Let’s talk about losing money. Not the most fun topic, but it happens. If something you bought goes down in value, you have a non-reportable loss. It’s called an “unrealized loss” until you reach the point where you sell.
Once you sell, you have a realized loss.
But that still doesn’t mean you have a deduction. In the case of a pension plan, we need to look at a couple of things next.
First, did this loss occur in a tax deferred account or a Roth account? A tax deferred account could be an IRA, inheritance IRA, rollover IRA, SEP-IRA, 401(k), KEOGH, Simple IRA or money purchase plan.
If you have a realized loss in a tax deferred account, you don’t have any tax reporting to do. You don’t have a loss you can take against other income. The IRS argument is that you already got a deduction when you put money in your pension plan. It’s different than when you lose money in a bad investment with after tax money. In that case, you have paid tax on the money. You haven’t gotten a deduction yet.
The loss in the case of after-tax money could be either an ordinary loss or capital loss. Capital losses are limited to just the amount of capital gains in that year plus $3,000. The unused capital losses roll forward to the next year when they are again limited to just the amount of capital gains in that year plus $3,000.
Roth IRA and Roth 401(k) losses are a little trickier. Right now, 2021, there is no way to take a deduction for these losses either. Prior to 2018, there was a way to take the Roth losses if you closed out your Roth accounts.
Now, however, that has changed with the Tax Cuts and Jobs Act (Trump Tax Plan) which became effective with 2018. The only reason I’m mentioning this old law years later is that it’s easy to get confused if you try to research this online. An old article may explain how to take a deduction, but the fact is that it’s gone now. The articles are old and the forms and process you’d use to take the deduction never work.
Bottomline, if you have a loss in a pension plan, realized or unrealized, there is no way in 2021 under current law to take the deduction.
If you lose money with after tax money, there may be some options. However, if you have personal bad debt (someone owes you money and stiffs you on it), you no longer will get a deduction. The same is true for theft or casualty losses, unless there is a federally declared disaster.
There are a lot fewer write-offs for individuals these days. And it seems like the changes continue to help business owners and real estate investors, at the expense of regular w-2 wage earners.
Some additional articles regarding pensions plans and investment losses:
Uncle Sam May Help You Out If You Lose Your Money On a Scam
Ordinary Loss or Capital Loss When You Sell Real Estate At a Loss?
The IRS is Getting Tough on Tax Scam Promoters